Malaysian Genomics Resource Centre Berhad's (KLSE:MGRC) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?
Malaysian Genomics Resource Centre Berhad's (KLSE:MGRC) stock is up by a considerable 15% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study Malaysian Genomics Resource Centre Berhad's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for Malaysian Genomics Resource Centre Berhad
How Do You Calculate Return On Equity?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Malaysian Genomics Resource Centre Berhad is:
20% = RM7.8m ÷ RM40m (Based on the trailing twelve months to September 2022).
The 'return' is the profit over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.20 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Malaysian Genomics Resource Centre Berhad's Earnings Growth And 20% ROE
To start with, Malaysian Genomics Resource Centre Berhad's ROE looks acceptable. On comparing with the average industry ROE of 11% the company's ROE looks pretty remarkable. However, we are curious as to how the high returns still resulted in flat growth for Malaysian Genomics Resource Centre Berhad in the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital.
Next, on comparing with the industry net income growth, we found that Malaysian Genomics Resource Centre Berhad's reported growth was lower than the industry growth of 29% in the same period, which is not something we like to see.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Malaysian Genomics Resource Centre Berhad is trading on a high P/E or a low P/E, relative to its industry.
Is Malaysian Genomics Resource Centre Berhad Efficiently Re-investing Its Profits?
Malaysian Genomics Resource Centre Berhad's very high LTM (or last twelve month) payout ratio of 199% suggests that the company is paying its shareholders more than what it is earning. The absence of growth in Malaysian Genomics Resource Centre Berhad's earnings therefore, doesn't come as a surprise. Paying a dividend higher than reported profits is not a sustainable move. This is indicative of risk. To know the 4 risks we have identified for Malaysian Genomics Resource Centre Berhad visit our risks dashboard for free.
In addition, Malaysian Genomics Resource Centre Berhad only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.
Conclusion
In total, we're a bit ambivalent about Malaysian Genomics Resource Centre Berhad's performance. In spite of the high ROE, the company has failed to see growth in its earnings due to it paying out most of its profits as dividend, with almost nothing left to invest into its own business. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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